Key takeaways
The share of foreign banking offices in host banking system assets has remained stable since 2010, with shifts from advanced to emerging market economy parents – mostly Chinese – and from subsidiaries to branches.
Branches pose higher risks to host countries than subsidiaries do, because of more volatile asset growth, greater responsiveness to home country conditions, and weaker control by host authorities.
The recent rise in branches’ liquidity ratios in advanced economies and the broader decline in their intragroup positions suggest a tightening of host authorities’ control.
host jurisdictions from advanced economies (AEs) and emerging market economies (EMEs). We use these data to complement previous analyses of FBOs that relied on either more granular single-country or less specific multi-country data. Our main contribution is threefold. First, based on the new database, we validate the commonly held view that branches and subsidiaries have distinct balance sheet structures. Previously established for just a handful of individual countries, our confirmation of this stylised fact underscores two points: subsidiaries’ balance sheets resemble those of local banks; and branches rely more on fickle wholesale funding and hold relatively large intragroup positions. Second, we document two new stylised facts. While FBOs’ combined share of host country banking assets has been stable over the past decade, this masks two underlying shifts: the gains by FBOs headquartered in EMEs – especially China – at the expense of their AE peers; and the decline of subsidiaries’ share in FBO assets, in both AE and EME hosts. In addition, using entity-level information, we show that subsidiaries are less profitable as a group than local peers. This may help explain the reduction in global banks’ reliance on subsidiaries. Finally, we use the new data to confirm and refine previous findings on the higher volatility of branch assets and to study trends in FBO liquidity ratios. Not only are branches’ assets and loans more volatile than those of subsidiaries, but they are also particularly responsive to home country financial and economic conditions. It is therefore unsurprising that several host prudential authorities have long expressed a preference for subsidiaries, and a few have actively adopted measures to “ring-fence” branch activities. Using newly constructed liquidity indicators and data on branch intragroup positions, we present evidence that authorities have recently tightened constraints on branches in AE hosts, although less so in EME hosts. The feature is structured as follows. The first section reviews the relationship between the types of FBO and the corresponding balance sheets. It includes a box with a high-level overview of the new FBO database. The second documents broad patterns regarding the presence of FBOs in host country banking systems. The third refines earlier findings on the volatility of foreign banking offices. The fourth reviews liquidity across FBOs and intragroup funding trends for branches. The final section concludes with policy considerations.
International business models and balance sheet structures Banks’ international business models fall into two stylised types: centralised global and decentralised multinational. These vary by customer and product focus, funding
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BIS Quarterly Review, March 2022
